Flagstar Bank, National Association (FLG) Earnings Call Transcript & Summary

So from Flagstar, we have President and CEO Joseph Otting; and CFO, Lee Smith. So thank you so much both for joining us.

Thank you.

Thanks for having us.

And maybe we were talking about this earlier off stage, but you came in, Joseph, approximately a year ago. Give us a sense of -- if you can go back over the last 12 months in terms of the task at hand when you came in, what you saw in terms of the risk opportunity because clearly, you found it interesting enough to sort of come back and get sucked back by working at the bank. And where do things stand today as you think about the health of the franchise?

Sure. Well, hello, everybody. Nice to be here and nice to be able to tell our story. So we made an investment in the bank in early March 2024 where Steven Mnuchin and myself raised a little bit north of $1 billion, put that capital into the bank. And really, it was an intent to kind of come in and be involved in an institution that we thought could be a strong regional bank in America. And at that point in time, there were some real questions around, was $1 billion enough? Does the bank have enough liquidity to survive? And what was the condition of the loan portfolio? Was it $1 billion of losses or was it $5 billion in losses? And so we really started out under 3 kind of contexts at that point in time. One was to really get our arms around the credit portfolio. And we, through the course of the next 9 months, really did kind of a complete deep dive, due diligence on the portfolio, where we looked at the entire book, including getting updated financials where we marked the portfolio based upon the debt service coverage and then the loan to value of it, add a secondary source of repayment. The other 2 big initiatives, obviously, was to raise capital within the organization and create liquidity. And so we did 3 relatively large transactions. We went from about 9% CET to just under 12% at year-end. There were 3 big ways that we did that. One, we sold our mortgage warehouse business. It was $6.5 billion. We sold that to JPMorgan at par. That created $6.5 billion of liquidity and roughly $650 million in unallocated capital. We conducted -- and concluded the Mr. Cooper's mortgage servicing and MSR transaction. That provided us roughly $280 billion -- or excuse me, $280 million of capital. It actually took some liquidity away because of the nature of some of the deposits. And then the last thing we did is we shrunk the balance sheet to roughly $100 billion. That created liquidity in that process as well. So all of that process was designed to really create a strong financial institution [ to which ] us to start to move in the direction of growing the bank. And now our initiatives are really around building a bank that has a highly diversified loan portfolio between commercial real estate, C&I and consumer-related assets. And we've launched a large initiative around commercial and industrial. We've hired 60 people in 2024, we'll hire another 100 people in 2025 to execute that strategy. And just in the fourth quarter from a stock position, we generated just north of $640 million of commitments during the fourth quarter and roughly just under $400 million in loan outstanding. So we're pretty excited about the direction that we can take the franchise being on very strong financial footing.

Got it. I guess maybe if you can break it down and so all the steps that you outlined around restructuring the business, kind of ringfencing the credit risk. And then the growth strategy going forward, maybe on the credit risk, it seems like when I talk to investors, you've seen that -- your update that you gave last month, but it feels like you have a pretty decent handle on credit risk. If you don't mind spending some time on just the health of the CRE portfolio and where the maximum pressure is in terms of the customer base that's still under stress and how you see that evolving from here.

Yes. So there were 2 primary concentrations in the commercial real estate portfolio. There was New York, Manhattan office space. That portfolio today is about $2.5 billion. It was about $3.5 billion when we arrived. And I would say that's where the biggest, like, hits to UPB were taken, was in the commercial real estate. As examples, building that was 2019, appraised for $100 million, reappraised in 2024 at $40 million. Our $60 million loan should have been a $24 million loan. And so as we worked our way through the portfolio, we effectively kind of reset based upon cash flow and loan to value is what that portfolio looks like. I think we really feel like we understand the risk in that book of business. And the observations by a lot of people is that sector has probably hit bottom and is starting to recover slightly. The other really big concentration in the bank is the multifamily portfolio. And that today, excluding about $2 billion in co-ops, is about $32 billion. And roughly about 13 of that 32 is in rent controlled. And so what you're having kind of occur in that space is you got a combination of 2 different types of product. In the rent controlled, they really do not have very many issues with occupancy because those buildings are 99% occupied. The challenge has been, as we saw this inflationary pressures on HVAC and labor and everything, they were somewhat restricted to a 3% increase on the rent increases. But what we found in our portfolio was the NOI in 2023, because we're always a year back, actually was up 6%. So the portfolios have held pretty well. The big challenge that you have in that space is those loans go from 3.5% to current market rates at 7% when they reset. But we've also had fairly good news in that regard, as we had $3.3 billion last year of resets. And 90% of those either paid off or are current today. So we're not seeing the stress that we personally anticipated to see in that portfolio when we actually went through loan by loan and then kind of build up what we thought the risk was in the portfolio. And 2 parameters I would point to was we also last year had $3.5 billion of loans that paid off at par from other sources, and 40% of that was substandard debt. So we're -- we obviously have $5 billion of resets this year, $5 billion of resets next year and $9 billion in 2027. But the borrowers that we have in our portfolio, which are predominantly family or closely held LLCs, really have supported these properties.

And I would just add to what Joseph mentioned around credit. I mean, if you look at our ACL reserve, it's just under $1.2 billion. We took over $900 million of charge-offs as well in 2024. So we've done a lot to sort of really get our arms around the portfolios. And to Joseph's point, we're still sitting today at just under 12% of CET1. I think the other point I would make because there's a lot of different metrics we're looking at, in the fourth quarter, we executed on some loan sales, including our largest CRE office loan. We've got a couple of sales that we're going to execute on in the first quarter. And we're executing on those sales pretty much where we've got those loans marked. So as well as all the payoffs and the reset history, we're getting more financials, we're getting more appraisals. We've done a lot to buffer the balance sheet with the ACL reserve and the charge-offs that we took.

Got it. And for those of us who've been following NYB or Flagstar now for a while, the rent regulation had a very detrimental impact on that multifamily space. Do you see anything from policymakers in New York and Albany that could actually provide some relief to make it a little more practical, I guess, for the landlords?

The only thing we've observed, there's been all kinds of proposals because, obviously, it impairs the ability to operate those units in a successful manner, and it's causing some projects not to put the CapEx in when there's turnover is you've started to see tax abatement, where large properties are going and negotiating tax abatement for a guaranteed investment into the properties. And we have had a number of customers that -- where they've done that, and it changed the property from a negative debt service coverage to a positive. So those -- that's where I think you'll see some action. But I just don't see in today's world where there'll be an overturn in Albany on the legislative actions. The Supreme Court last year validated -- not that this was like legal, but whether the legislators have the right to impose that legislation, and the Supreme Court came back and said they did. So I think that was kind of the nail in the coffin, so to speak, that I don't see that getting overturned.

Understood. I guess the other thing, I think at the time, it felt very courageous of you for putting out 2-, 3-year guidance around what you at least thought the guardrails around earnings or ROE. When we think about that forecast, I'm sure you've fine-tuned it over the last 12 months. Where do you have the most conviction versus where do you see the biggest risk on why the bank may not be able to achieve those targets?

Yes. I think there's 3 big levers that we have available. One is our funding cost. We have now been able to successfully during the course of -- between March of 2024 and today, we reduced our FHLB advances by $11 billion. And we have those at $13 billion, those are expensive as a funding source. We replaced those with deposits. We also paid off the Fed discount window. There was $4 billion at the Fed discount window we paid off. And then we reduced our broker deposits by $2.5 billion. So I think when you think of the overall funding cost matrix, that progress is going to allow us to continue to move into more relationship deposits and pay off those high-cost deposits. That's number one. Number two, on the loan side, the resets on the portfolio on the multifamily, $5 billion, $5 billion, $9 billion. When those are resetting roughly from let's just use 3.5 to 7, that's a sizable increase in the net interest margin for the company. And so you're going to see that. And then in addition to our strategy of being more C&I related, those are better spreads. They're generally priced on a variable basis over SOFR, or if there's fixed, there's generally hedges that the client will take out. So I think on the margin, on the coupon side, we have a good tailwind behind us. And then the third that I would say is we committed to take out $600 million of operating expense in the company, and we are well on our way to achieving that between '24 and '25 to take those costs out. And so I think there are 3 big levers there that we have an advantage. I think on the other side, if you said, well, where do you see risk? I think the risk would be is if we saw a 200 or 300 basis points increase in interest rates. And what the impact would be is whether our clients would be able to support those properties with liquidity or other cash flow, that could be the risk and the projections that you could see more deterioration.

And just on that, you've seen from time to time, your stock reacts negatively on how the market perceives where interest rates are headed. So one, Fed funds versus where the 5 or 10 years out of the curve, what matters more? And if we don't see any action from the Fed and the 10-year remains around between 4.5 to 5, is that a bad outcome for the bank?

Yes. So generally, most of the multifamily is priced on the 5 end year the curve. But as loans were maturing, people have a choice to go SOFR on the short end. And a lot of people stayed on the short end because if we were sitting here 6 months ago, all of us probably would have bet that interest rates were going down. And now the yield curve has steepened slightly, and it appears to be interest rates will be flat for a longer period of time. And so I think most of the product will roll into the 5-year going forward. Because there's a bias that interest rates actually could go up. And I think people are looking for certainty on the properties.

And does that, at the margin, make you worry more about credit? Or at this point…

Yes, it's more about credit because we clearly will reprice a coupon from 3.5% to 7%, so...

But is that a big deal credit quality wise? Or...

Pardon me?

Is it going to be a big issue from a credit risk perspective or when do rates become an incremental risk that you've not accounted for as far as credit quality is concerned?

Yes, I think you have to look at the -- there's an economic way to look at the borrower, and there's a borrower behavior. And because we don't -- we did not lend into REITs or large institutional investors -- the portfolio is generally made up of family-owned businesses or closely controlled LLCs, that what we have found is, economically, the property may show that it's slightly less than 1:1 debt service coverage. But the owners of these properties continue to feed the properties. And they continue to pay us off on -- we had $3.5 billion of payoffs. The resets have remained current. Our nonaccruals, 60% roughly are still current on their payments. So I think it gets to a point -- and every individual borrower is different. At what point do they get to if interest rates continue to rise that they finally have to give up on the property. Now one of the advantages that we have is a lot of our family-owned businesses have been in the family for 2 and 3 generations. Grandpa bought the building for $3 million. It's worth $50 million today. They've got a $30 million loan. If they lose the property, they have a $27 billion gain that would be subject to taxation. And we're finding that stickiness has caused people to say, "I'm going to support these loans because, a, I don't want the tax liability. And I'm hopeful that between rents increasing and maybe interest rates going down, I can get back into harmony where the project by itself will support the loan."

Got it. Maybe switching gears to the growth aspect. The C&I bank, as you mentioned, means -- I don't need to tell you this, I mean banking is an extremely tough and competitive business.

It is.

But give us a sense of why the level of confidence you have in terms of the bankers you hired and why you think they should be able to move either their books of business or grow that C&I book, while also growing maybe deposits?

Yes. So we've hired 60 people in the C&I space. Our model is to hire highly experienced people that we've worked with in the past. I've worked in -- I started as an analyst, became a covenant compliance guy, became an assistant relationship manager, became a relationship manager. So I spent really 35 years in this space through 3 institutions, Union Bank, U.S. Bank and OneWest Bank. I know a lot of people and I've worked with a lot of people. And so our story is a fun, fresh story to be part of a success story with this organization. So we specifically have hired people with like 25 years more experience who are known in their marketplaces or in their industry as someone who's a really good banker. And what happens a lot of time is they come join Flagstar, client had never heard of Flagstar. They introduced Flagstar to them. The next thing you know, we're joining the bank group or providing credit or services into that relationship. That's our model is how we're going to grow. And then we think there's really 4 key ways to compete in the banking business. You can compete by geography. Pretty easy to disrupt because if you're doing well in a geography, trust me, all the other banks are going to show up. You can compete by products. But again, the industry are pretty quick product adapters. You can compete on price, but somebody else can always be cheaper. Or you can compete on service. And our really whole kind of strategic plan is to compete where people view us as a really high-quality service provider. And when you think about, well, what's transpired in the last 12 months or so, Silicon Valley went away, very high-quality service providers. First Republic went away, very high-quality service provider. Union Bank went away, very high-quality service provider. And Signature Bank went away or became -- part of it became part of our family. But those 4 key banks that really define high-quality service have all kind of evaporated. And in my mind, there's a role to be played in that space.

The only thing I would add on the C&I side and credit to Joseph and the other executives, everybody we've hired is known to somebody. We haven't used the recruitment firm. And so we know the quality of the people that we're hiring. And I think from a growth point of view as we sort of introduce these new C&I lending verticals, they're new to us. So we have a lot of runway. You look at a lot of other banks who are probably maybe full level close to their concentration limits. And so if these businesses are looking to expand their facility, we are ideally situated to be able to come in and take a piece of that expansion.

Got it. And I guess, maybe tied to C&I and services, talk to us a little bit about tech spend. Like is the technology infrastructure in place to support that kind of -- the kind of business you're looking to drive? Or what are the 2 or 3 big investment projects underway at the bank?

Yes. So when we went to OneWest Bank, which was the original IndyMac -- IndyMac bank, when we showed up, they didn't know how to spell commercial banking. Nobody had ever boarded a commercial loan. And so we really started from day 1. We had to go get AFS systems. We had to put a treasury management system. We had to put foreign exchange, derivatives, all the products had to be assembled. Fortunately, coming to this organization, there is a baseline of products. We today can offer 401(k) services. We can offer corporate cards. We can offer merchant services. We can do treasury management. We have all the products. We need to enhance some of the products predominantly in the treasury management system, but those products are in place with minimal expenditures. We think we can have products that can compete in the industry. And so it's really not a lot of incremental cost other than people to be able to execute the strategy. And then in addition to general banking, we also have developed specialized verticals. We're in entertainment. We hired City National's person, which is probably the best bank in the entertainment world has joined our bank. We have a sports group now that's functioning in New York. We have an oil and gas group that has closed already 2 transactions that are not even here 60 days. And so we continue to play both on the specialized industries and also in general, commercial and corporate.

And the other thing you stressed on the call and just in terms of the growth in fee revenues is this essentially going to be driven by bringing in the lending relationships and then providing ancillary services to the customer base. Is that the idea?

Well, it's a combination. One is, we come in to the company really recognizing what relationship banking and lending and build and commercial is all about. We've spent a lot of time looking at our customers now and really saying, what are we doing for the customer and what could we be doing for the customer. And there was limited motivation, incentive for people to cross-sell in the company. And we've moved that up now as an important part of any relationship when we do a relationship review, we just don't want to be a lender. We want to have other products that justify our participation in the lending product. So we have this big customer base that we get a first go harvest and to -- and make sure that we're providing them all the services that we can provide. And then second of all, there was a fair amount of freebies that I think just by the nature of lack of accounting and that people gave away to their customers, that we're going to go have some discussions about customers if they want those products, they're going to have to pay for them. And then I think, Ebrahim, there's the third bucket, which is we bring new customers into the bank, obviously, cross selling those customers. So there's really kind of 3 big buckets where we see the fee income coming from.

And the only thing I would add on the fee income is don't forget about that mortgage business as well, which gives us a hedge in a declining rate environment. So we've still got the retail mortgage origination business. We're obviously planning on originating loans for our private client customers. And that can generate significant fee income certainly in a declining rate environment as well.

Got it. Just following up in terms of the bankers. And you mentioned you've known these people or many of them have worked with you in at prior banks. What's the competitive backdrop in terms of banker hiring today relative to -- is it the big banks, other regional banks? Is it intense?

Well, of course, it's competitive, it's like [ Hansen ]. But I think people are looking for a success story in a place that they can have fun. And in some institutions, they're constrained either by where the prospects are allocated or the number of credits that are already involved. It's kind of like you come to Flagstar, you get a fresh start. Don't have a big portfolio, I get that. I can go to all my old customers and try to become part of their relationship. I think most people, like probably a lot of you sitting in the audience today see big upside in the stock of the company. We trade at 70% of book value, that's up from 60%. I think as we get more validation around our -- that we feel comfortable with the loan book and everybody else starts to get comfortable with that and they see the growth and they see the margin and the spreads increase in the bank, we get to book value. And then if we get to the peer group at 1.7, 1.8, the stock could be easily a $28 or $29 stock price. And I think people are excited about being part of that as well.

Got it. And I guess you mentioned earlier about paying down Federal Home Loan Bank, wholesale funding, replacing them with lower customer or retail deposits. But talk to us about just the deposit engine for those of us, the NYB part of the business, never quite known for deposit growth. Just -- I mean I'm assuming it's still very competitive in terms of growing new deposits, and I'm wondering if rates don't go lower from here, at some point, where do things plateau out? And how confident are you in terms of actually growing lower-cost customer deposits?

Yes. No, absolutely. So it comes from -- when we think about core deposits, so as we said on the earnings call, in the fourth quarter, the consumer bank grew core deposits $900 million. The private client bank grew core deposits $500 million. And so we think that we can continue in those 2 businesses to grow core deposits. And the other area where I think we can bring in more deposits is as we're doing more C&I lending, we'll leverage those C&I loans to bring in more deposits from these new C&I customers as well. Coming back to the private client group, we've just introduced an interest-only mortgage. And if you think about broad product set of mortgages, so we've got the Jumbo arms. We've got construction mortgages, professional loans, HELOCs. The intention is to leverage those to bring in deposits. We'll do more mortgages that we'll put on balance sheet. But we'll get the deposit relationship as a result of that. And then on the consumer bank, we're always looking at the markets that we're in to just see what is the competition doing, where do we need to be from a pricing point of view. And what I would tell you is when we look at our retail CDs, as an example, as they've been maturing, we've been retaining about 75%, 80% of those, and then we've been making up the gap with new CDs that have come in from either new or existing customers. So they've remained relatively flat. And as we think about the first quarter and just the pricing, we've got $5 billion of retail CDs that are maturing in the first quarter that are pretty close to 5% and they're going to reprice significantly lower. And then the last part of our promotional deposit price in the 555, the 535 programs, that will be running off in the first quarter as well and repricing at a lower cost as well. So not only do we think we can bring in new core deposits, we've done a nice job of managing the cost of those deposits lower as well.

Got it. Maybe switching gears to the regulatory outlook. I think from a bank shareholder, investor standpoint, lots of optimism around what the Trump administration could mean for banking supervision and regulation. Joseph, you've been the head of the OCC under the first Trump administration. If you don't mind, just share your perspective in terms of how a punitive the supervisory backdrop was over the last few years and what should bank shareholders expect in terms of relief that the banks could get?

Thank you for the question. I've obviously been asked that question a lot over the last 30 days. So I think to put it into context, there's really like 2 core areas that a Comptroller has oversight and responsibility for. One is kind of rulemaking and policy. And a rulemaking and policy process usually is about a 9-month runway. So new Comptroller shows up or Rodney's in that desk, effective now. By the time you write the rule and you run it through comments and put it out for public comment and respond to all the public comments, it's about a 9-month process. The other side of that coin is really how you influence the supervision part of the bank. And that's where a Comptroller really has a lot of input and variety to that. And what I mean by that is, I'll give you like an example, is when Tom Curry was the Comptroller, he had put a stake in the ground that your AML BSA had to be bulletproof and clean and no violations of the pillars. Or if there were, irregardless of your capital and liquidity, you couldn't open a branch, close a branch, introduce a new product, expand the bank, merge the bank. He was very rigid around that particular part. When I got to the OCC, I was like, well, this is important, it's a rule, it's a law, soundness and safety and it also protects the United States. But if a company has good liquidity and good capital and they're working on these pillars, then we need to allow them to continue to run their businesses. And so when I think about where a new Comptroller is, he's going to, I think, put things in the context in my mind of what's the most important. And then I think when you mix in that Trump 2.0 is really focused on growing the economy, and banks can be a source of strength for that growth. I think they're going to really say we want banks in the market, providing services and lending to businesses that allow them to grow. And the speeding ticket part of this job, which is catching you going 38 in a 25 and writing you a ticket and then making you spin all this effort on that speeding ticket is probably going to diminish. It's not going to go away, but it's going to diminish a lot. And so the better criteria is what is the bank's liquidity, what is its capital. And then can they help grow the economy. It's astonishing to me, with the billions of dollars that have been spent in the banking business, that 75% of all the Category 4 banks and above are rated unsatisfactory on their compliance program. This is staggering to me, like how can that possibly be? Well, a lot of it is you can get to 90% pretty quick, but the last 10% is really tough. And it doesn't impact safety and soundness. So with that as the backdrop, I think you're going to see a more pro-growth. I think you're going to see a more pro-lending, more expansion. And I think you're going to see an administration that will support M&A and new creations of banks because the other thing that occurred under the FDIC and the OCC over the last really 4 years was trying to get a new bank charter was almost impossible. And I think you're going to see a turn to that -- let's get fresh capital, let's recognize private equity as a valid source of fresh capital into the banking business. And I think this negatism towards private equity is probably going to go away. And I think if people want to sell or buy banks, they're going to be given the ability to do that based upon the merits of the bank, not the policies in Washington.

And we discussed earlier in our regulatory panel with the CEOs of BPI and ABA, does it matter? I guess we have an acting Comptroller of the currency right at the moment. Does it -- from a practical perspective, if we don't have someone permanent, does that limit that individual's ability to enact change?

Yes. Usually, there is pretty good guidance to the acting about the Administrative's kind of overall viewpoint. And previously, Keith Noriega was the acting for me. Keith began to plow the field. So when I stepped into the tractor, I could just -- Keith already knew what feels what we wanted to do, where were our priorities, and he began executing on those. And I think that's what we'll find with the new Comptrollers. Rodney will step in. He'll start the process. I think we'll see tangible improvements really quickly. And then I think the new Comptroller can come in, which is usually a 3- to 6-month process to get through the confirmation process. And they'll already have a path that's been created for them.

Got it. And I guess when you bring this home to Flagstar, you've obviously done a lot over the last year to reposition the franchise. But is there an aspect to regulations or supervision that could actually give you some breathing room in terms of what you're doing day-to-day?

Well, I think you got to really question sort of Category 4 banks start at $100 million mark. And I think there's general consensus that that number probably should be $250 million, that it's too punitive at the lower level. The other element that I think too punitive is if you have a business plan that says in a 3-year period, you're going to get to 100, when you get to 100, you have to be compliant to go over the line. And I think there's some thoughts of, is it necessary that you're 100% complaint to get there? And do you really need to start back at 85, incurring all that cost for that journey? And so I think if the dollar amount doesn't get lifted, I think you'll see more flexibility as you're ramping up to move in that direction. Because today, we have a bunch of regional banks clustered in that 70% to 85% range because they don't want to all of a sudden trip the regulatory input of we need you to add $20 million or $30 million to your infrastructure to start building towards being a Category 4 bank.

It makes sense. And from a capital standpoint, so you have well in excess of the CET1, 11% at the high end, you're targeting. I think you mentioned earlier by your math, the stock would be in the 20s. If you execute on what you -- so why not buy back stock today? Or do you see the room to deploy all that excess capital towards organic growth?

Yes. We think that on a compounded basis, if we can get to 11 or 12 return on capital, why would you give that capital up today? We really think that we're going to run at deploying that excess capital. And then we'll have another discussion a year from now about that excess capital if we haven't been able to redeploy, what are our options of returning that to our shareholders. But we're all in on growing the bank. You didn't ask the question, but I usually get this question, so maybe I'll answer it. A lot of people say, well you're at $100 billion today. Why don't you just fall below $100 billion, and you get rid of all those regulatory. But the reality is, even if you go below 100, you're subject to enhanced standards for 4 quarters. The second thing is we'd have to fall all the way down to 85 before we would get all of that taken away. So in my mind, it's a strategic advantage to be over 100. We don't have to go ask to do it. We're already there. We're building the infrastructure to be compliant. So in the future, if the opportunities present itself for acquisitions or whatever, that will be one less thing we'll have to tackle at that point in time.

I think given the discount to book we're currently trading at, we believe that by investing in the franchise, we can create much more shareholder value by growing the C&I businesses and executing on the 3-year plan that we've obviously put out in our earnings materials. And so we think that that will generate a much greater return for our shareholders by keep investing in the franchise.

Got it. And while on crossing $100 billion or Category 4 banks, I think -- talk to us around long-term debt. Is that something you're thinking about at the present in terms of do you need to raise long-term debt, the level of which you want TLAC debt at the bank? What is the latest of that?

I think that requirement is gone now. I don't think -- got -- is going to recirculate back. I think if you're a bank, $250 million, you may have some requirements along those lines. But I don't think a bank of our size will -- in the next draft, that will be included. I think on our capital plan, we're kind of a one-trick pony coffin. And I think our plan would be late in '26 probably to look at doing some preferred into the balance sheet, so to diversify the capital structure a little bit. And then on the investment grade, we meet with the rating agencies every quarter. They like what they see, obviously, with the capital and the liquidity and the refocusing and diversifying the balance sheet, but they really want to see the company become profitable. And we're currently on track now to become profitable in the fourth quarter of 2025, build strong profitability in '26 and then build what we think will be in the top 25% of profitability for regional banks in '27. My guess is we start to have dialogue a year from now on upgrades to investment grade.

Got it. I guess one last question, just around regulations changing. I think part of the view around regulatory changes is also that we could see a pickup in bank M&A. When you think about your franchise positioning, as you've been at a bank that's pushed -- entered strategic partnerships back at IndyMac, OneWest, give us your sense of how you see bank M&A evolving and does bank M&A have a role to play for Flagstar?

Yes. So it's like maybe 3 questions there. So let me...

Well, I only have 2 minutes left.

So I think you're going to see a lot of the M&A down in the $20 billion and $30 billion banks. I think you're going to see a lot of those banks come together and become $50 billion and $60 billion banks. And that will bring either in-market consolidations or new geographic locations for those banks to be able to operate in. So I think there's a lot of discussions and activity in that particular space. When you start to go up the food chain, all of us could fit in a room to have some dialogue. And our future is we're really focused on building out the risk governance, the processes of the organization, so we can grow. And that growth can be organic, and we think it can be acquired in the future. We're pretty adept at buying banks. We took over IndyMac and we bought First Fed, then we bought Loyal Bank & Trust and then we bought part of Citibank. When I was at U.S. Bank, we did 100 acquisitions. I led a number of those acquisitions. So it's a skillset we have. Organic is always the best in my mind, and that's really where we're going to put the gas pedal on. But I do think in the whole kind of ecosystem, we would also be viewed as a very attractive franchise once you can really focus on, hey, the credit issues are behind them. They're growing their C&I, their margins are back and they're profitable. Because we have a California, Arizona, Florida, New York, New Jersey, Ohio, Michigan, Indiana franchise, that, for a lot of banks is pretty attractive, either because you're in market consolidating or you're getting new geographic areas. And so I think we have a group of investors that own a big percentage of the bank. Unfortunately, we're public already, so they can sell whatever they want. But I think this is a franchise that will be viewed very attractive in the future.

Exactly. All right. With that, Joseph, Lee, thank you so much.

Thank you very much.

Thank you for having us.